Inefficient rushes in auctions

We analyze a setting common in privatizations, public tenders, and takeovers in which the ex post efficient allocation, i.e., the first best, is not implementable. Our first main result is that the open ascending auction is not second best because it is prone to rushes, i.e., all active bidders quitting simultaneously, that undermine its efficiency. Our second main result is that the second best can be implemented with a two-round auction used in real-life privatizations. We also show how this result generalizes using a survival auction with a novel tie-breaking rule.Ángel Hernando-Veciana thanks the support from the Ministerio Economía y Competitividad (Spain), Grants ECO2012-38863 and ECO2015-68406-P (MINECO/FEDER), MDM 2014-0431, and Comunidad de Madrid, MadEco-CM (S2015/HUM-3444). Fabio Michelucci thanks the research support of Boston Consulting Group, Prague, and financial support for his stay at the University of Queensland, where he worked on the revision of this paper, from the People Programme (Marie Curie Actions) of the European Union’s Seventh Framework Programme FP7/2007-2013/ under REA Grant 609642